Correlation Between IShares Aerospace and GMO Quality

Can any of the company-specific risk be diversified away by investing in both IShares Aerospace and GMO Quality at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining IShares Aerospace and GMO Quality into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between iShares Aerospace Defense and GMO Quality ETF, you can compare the effects of market volatilities on IShares Aerospace and GMO Quality and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in IShares Aerospace with a short position of GMO Quality. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares Aerospace and GMO Quality.

Diversification Opportunities for IShares Aerospace and GMO Quality

0.74

Correlation Coefficient

IShares Aerospace  GMO Quality

Poor diversification

The 3 months correlation between IShares and GMO is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding iShares Aerospace Defense and GMO Quality ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on GMO Quality ETF and IShares Aerospace is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on iShares Aerospace Defense are associated (or correlated) with GMO Quality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of GMO Quality ETF has no effect on the direction of IShares Aerospace i.e., IShares Aerospace and GMO Quality go up and down completely randomly.

Pair Corralation between IShares Aerospace and GMO Quality

Considering the 90-day investment horizon iShares Aerospace Defense is expected to generate 0.83 times more return on investment than GMO Quality. However, iShares Aerospace Defense is 1.21 times less risky than GMO Quality. It trades about 0.21 of its potential returns per unit of risk. GMO Quality ETF is currently generating about 0.13 per unit of risk. If you would invest  12,517  in iShares Aerospace Defense on February 19, 2024 and sell it today you would earn a total of  1,033  from holding iShares Aerospace Defense or generate 8.25% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

iShares Aerospace Defense  vs.  GMO Quality ETF

iShares Aerospace Defense

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Aerospace Defense are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, IShares Aerospace may actually be approaching a critical reversion point that can send shares even higher in June 2024.

GMO Quality ETF

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in GMO Quality ETF are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, GMO Quality is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with IShares Aerospace and GMO Quality

The main advantage of trading using opposite IShares Aerospace and GMO Quality positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IShares Aerospace position performs unexpectedly, GMO Quality can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in GMO Quality will offset losses from the drop in GMO Quality's long position.

The idea behind iShares Aerospace Defense and GMO Quality ETF pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Volatility Analysis module to get historical volatility and risk analysis based on latest market data.